Canadian home prices are projected to see minimal growth in 2024 and only modest increases in the following years, despite anticipated interest rate cuts. Analysts polled by Reuters indicate that while affordability may improve slightly, it will still remain challenging for many.
Current Market Trends
Following a substantial 55% surge during the COVID-19 pandemic, average home prices in Canada have only dropped by 14% from their peak in early 2022. This modest decline has occurred despite a cumulative 475 basis points increase in Bank of Canada rates through July 2023. Housing affordability is currently at one of its worst levels since 1990, as measured by the Bank of Canada’s index.
Impact of Recent Rate Cuts
Recent rate cuts, including two 25-basis-point reductions since June, have not significantly boosted housing demand. Despite expectations for further reductions later this year and into 2025, the effect on the housing market has been limited. Analysts forecast that average Canadian home prices, which have decreased by 1% so far this year, will see only a 1% increase in 2024. This anticipated rise would fall short of the overall inflation rate, expected to be 2.5% for the year.
Future Price Projections
Looking ahead, home prices are expected to climb by a median of 2.8% in 2025 and 3.0% in 2026, which is consistent with earlier forecasts from May. Olivia Cross, a North America economist at Capital Economics, notes that while lower borrowing costs are expected to support the housing market, they have not yet led to a significant rebound in prices. “Affordability remains stretched compared to pre-pandemic levels,” Cross said. “Thus, price gains are likely to be modest.”
Supply and Demand Dynamics
Recent data shows that housing starts in Canada surged by 16% in July on a month-to-month basis, according to the Canada Mortgage and Housing Corporation (CMHC). However, new listings only increased by nearly 1%, and home sales fell by 0.7%, as reported by the Canadian Real Estate Association. The increase in supply may pressure prices further, especially as many Canadians face potential hikes in borrowing costs due to upcoming mortgage renewals. Approximately C$300 billion ($222.4 billion) in mortgages are set to be renewed next year.
Mortgage Renewal Landscape
Unlike the U.S., where homeowners can secure fixed-rate mortgages for longer terms, Canadian mortgages typically have a 25-year term with renewals every three or five years. This difference means that Canadian homeowners are more susceptible to fluctuations in borrowing costs.
Outlook for First-Time Homebuyers
Most analysts expect that purchasing affordability for first-time homebuyers will improve over the coming year, though the extent of this improvement is uncertain. Rachel Battaglia, an economist at RBC, suggests that while additional rate cuts could stimulate demand, the impact will likely be gradual. “Significant reductions in rates will be necessary to make a noticeable difference in ownership costs, particularly in Canada’s most expensive markets,” Battaglia noted.
Potential Effects on Rental Markets
Persistently high home prices could continue to exert pressure on rental markets, potentially causing rents to rise faster than home prices in the coming years.
Conclusion
Overall, while Canadian home prices are expected to rise modestly in 2024 and beyond, significant improvements in affordability and substantial price increases are unlikely. The housing market’s response to future interest rate cuts will be closely watched, especially in the context of ongoing affordability challenges and evolving supply and demand dynamics.
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